Could non-compete clauses be stifling entrepreneurialism?

Picture this: a senior executive from a big PR agency quits to set up on their own and is allowed to take the clients they work with – all with their former boss’s blessing. No restrictions on who they can approach, no legal wrangles, just a goodbye and good luck. This is no fairy story – though a non-disclosure agreement means that those involved cannot talk about it – but amicable splits like this are becoming rarer than unicorn horns.

The fact is that most agencies restrict what staff can do when they leave, and for good reason. "An agency is not some kind of open house where you draw a salary, build client relationships and then steal the business," points out College Hill founder Alex Sandberg, now set up on his own as an independent consultant under the Averdant banner.

Without exception, everyone to whom PRWeek spoke was sympathetic to this principle. Contracts typically include three restricted covenants: essentially, you are not allowed to try to poach either staff or clients after you leave your job until a fixed period of time has elapsed (for example, six months) and you cannot work in competition with your former employer for a similar period, either on your own or as someone else’s staffer.

"You really can’t tolerate someone walking out with a load of business that isn’t theirs," says one agency boss. "Clients are also an issue," points out another senior industry source. "From time to time they are deeply dishonourable. You can find clients wooing your staff away with the promise of great riches. Household brands have nicked people."

Clearly, agencies need to protect against this. However, observers have noticed that the way this is done is becoming increasingly unfair. Some non-compete clauses have become staggeringly restrictive; frankly, there are apocalyptic-cult leaders who demand less loyalty from their followers.

"There are a lot of bad contracts being signed out there," one agency CEO says. "Some agencies have made their staff sign awful things. We saw a contract recently where the person leaving was prohibited from working anywhere that, and I paraphrase, ‘does something similar to us’ for a year. Unless you’re leaving PR to be a teacher, you’re screwed. You need to compensate someone very well if you’re buying them out of the ability to work. The agency wasn’t going to pay for their time, it just stopped them working. There is some very aggressive behaviour around but that is the worst that I’ve seen. Six months, yes, but I’ve never seen a year before."

Bully-boy tactics

This is not an isolated case. "A lot of bully-boy tactics are going on in the marketplace," says one agency veteran. "Something needs to be done about it because it’s a negative force in an industry that is meant to be about creativity and freedom. The trouble is that, nine times out of ten, employers have more money in the bank than individuals." If you find yourself as an individual up against a big corporate, "it’s quite scary", says another.

In the past few years, well-publicised cases such as Weber Shandwick pursuing Hill+Knowlton Strategies through the Texas courts after two of its former executives moved to the rival agency could suggest that large multinational marcoms players are among those most likely to enforce what they believe to be their rights. But Sandberg suggests smaller agencies might do well to protect their business interests in the same way. "Someone does the dirty and the agency goes all weak at the knees and declines to enforce the contract," he says. "No other professional services industry would tolerate it. I don’t think that it would happen at Goldman Sachs – so why do you get it in our trade?"

Anecdotal evidence suggests a number of agencies – not all of them large – agree. While enforcing contracts is one thing, the real problem comes when good human resources practice leads to what might politely be termed ‘gamesmanship’, which in turn tips over into contractual bullying.

Another agency boss thinks a couple of factors are at play in restrictive contracts, one of which is today’s challenging economic circumstances leading to people keeping a tight grip on the business they have. "It’s partly recession," he suggests. "But it’s also the size of corporates – the big agency groups are getting bigger and often the people at the top of those corporate piles are far removed from the spirit of setting up, of entrepreneurship."

Young agencies can find themselves in legal difficulties when they attempt to hire people who are locked down by contract issues. "It’s a vicious circle," says former Citizen Brando chairman Nick Band, who relaunched his strategic consultancy Berlin a year ago after being forced by his former employer to close it after a legal wrangle. "It’s damaging to enterprise and creativity," he adds. While some start-ups declined to speak about this, even off the record, the founder of another recently formed agency said: "I’d be amazed if contracts weren’t getting more restrictive. I’d be looking to protect my client base as best I could."

As a very broad rule of thumb, the longer a non-compete clause is, the harder it is to stand it up in a court of law – but well-drafted documents with lengthy restrictions might still be persuasive to a judge. One way around this would be for people to take more notice of what restrictions they will and will not accept as part of job negotiations in the first place. "That won’t happen," laughs one corporate comms veteran. "The hiring process is like falling in love: at that stage you’re not thinking about the end. It would be like saying ‘darling, will you marry me? And by the way, I want to be cremated’."

Peter Morel, employment law expert and founder of Kennedy Cater, agrees but stresses that the beginning of a relationship is exactly when these issues should be addressed. "When a prospective employer is courting you, every clause in the proposed employment contract needs to be considered carefully, in particular those clauses that impose post-termination restrictions," he says. "If divorce comes, it is those clauses that will govern the break-up. Onerous restrictions might inhibit a former employee’s ability to earn for months after they have ceased to be paid by their former employer."

Take contracts seriously

People tend to negotiate hard on salary and benefits, but usually have a blind spot for the small print governing the back end of their contract. "It is a mistake for individuals and companies to think that they are not worth the paper they are written on," Morel continues. "Increasingly, the real value in many businesses is the human capital working within it. PR is a good example of this. Courts are quite prepared to uphold restrictions freely entered into if the employer has a legitimate, narrowly defined business interest to protect."

"Anyone who joins an agency needs to take their contract seriously," adds Nan Williams, group chief executive of Four Communications. This includes reviewing key terms and being happy to live with them. "If restrictions are unreasonable they will probably not be able to be upheld in any case," she says.

The lesson in all this is a simple one: everyone needs to read their contract carefully before signing it, and preferably only after consulting a lawyer. But it is equally true that agencies might think twice about putting highly restrictive clauses into contracts in the first place. Yes, they may well be unenforceable – but it is clearly done in some cases on the basis that individuals are unlikely to want to risk legal action and the professional stigma and costs that action may entail. For now, the practice of unreasonable contract demands may still be in play, but it is up to the industry to change the game.